difference between FRAs and Interest rate Swaps?

CFA Level II
#1

It seems to me that they are the same? Can someone explain the difference?

#2

With an FRA, you agree to pay a fixed rate, that’s it. With a swap, you pay fixed and receive float, for example. There are two sides to it, not just locking in a rate like with FRA.

#3

thanks, i am getting dumber and dumber after studying 6 hours a day and working 9 hours a day, this is so exhausting!!!

#4

Actually, they are identical - except for the fact that FRA has 1 settlement period whereas Swaps have multiple settlement periods.

Dreary’s point is not valid as the economic rationale is same - with swaps you net the payments - with FRA - it is settled in cash (diff between the fixed vs. current floating).

#5

CMLSML, true, but if you want to get a loan in 3 months and want to lock in a rate today, would you go for an FRA or for a swap? Even though from a profit/loss point of view they may be same, in reality, you will buy an FRA, not a swap. Another major diference is that FRAs are fixed in advance, paid in advance, while swaps are fixed in advance, paid in arrears.

#6

Could someone elaborate on the difference?

Both have fixed and floating sides exchanging cash flows, right?

#7

To keep it simple:

FRA = pay fixed for one period

Swaps = pay fixed over multiple periods

As such:

Swap = multiple FRAs

#8

An FRA is equivalent (but not identical) to a single-period swap.

The primary difference is that the FRA is settled in advance while the swap is settled in arrears.

#9

Thanks a lot

#10

My pleasure.